FirstGroup defies expectations after franchise failure

After a challenging year, FirstGroup (FGP) finally has some good news to report to the market. The transport operator’s adjusted attributable profit more than doubled to £82.1mn across the 52 weeks to 25 March – and its £154mn operating profit surpassed analysts’ expectations by £6mn. 

These figures were no doubt a pleasant surprise for shareholders, who’ve endured a handful  of recent disappointments. Most notably, the company was stripped of the TransPennine Express rail franchise last month after serious declines in the reliability of its service. Ongoing industrial action by rail and bus workers has also been tricky for the company to negotiate.

The group was ultimately buoyed by a year-on-year increase in passenger numbers across its services. First Bus saw volumes grow by 20 per cent – with revenue growing to £660mn from £570mn in FY 2022. Improvements in the division’s operating margin were attributed to passenger demand, as well as “network and fare realignments” that better matched services with the people who use them.

Meanwhile, First Rail logged 263mn passenger journeys in the last financial year, an improvement of 62mn on the prior period. Success in this arm of the business was partially underpinned by surging leisure travel. 

The company has predicted that it will find itself in a £10-20mn net cash position by the end of FY 2024, despite plans to invest £130mn on electrifying its bus fleet and return capital to shareholders. FirstGroup proposed a share buyback of £115mn in its results following the receipt of proceeds from the sale of US-based Greyhound bus service. 

Despite its bullish tone, management has acknowledged that the sector’s economic and industrial relations backdrop could remain difficult for some time. This has not, however, dimmed the shine of FirstGroup’s shares – which were up 17 per cent by noon on the day of its results announcement. 

Its current trading outlook is “in line with expectations”, according to the company, and FactSet broker consensus puts its price-to-earnings multiple at almost 15x for the year to March 2024. That doesn’t seem like an unreasonable price to pay, especially in light of the firm’s better-than-expected profits. 

But we still think that uncertainty around labour disputes and the TransPennine failure give investors plenty of reasons to be sceptical. We remain on the sidelines for now. Hold.

Last IC view: Hold, 97p, 9 November 2022